LONDON 28 AUGUST 2013: The tradeoff between rising energy costs and the low carbon agenda continues to see policy makers retreating from traditional renewable energy support mechanisms; forcing the industry to look for innovative financing solutions. At the same time, energy mix optimization has come to the fore, particularly in emerging markets, with governments increasingly seeing the need to intervene in order to manage energy security in a cost-effective way, according to EY's latest quarterly Renewable energy country attractiveness index (RECAI) report, released today.

In recent months, Europe has seen further policy U-turns and reactive subsidy cuts, in countries such as Czech Republic, Italy and Greece, severely impacting project revenue streams and contributing to a slow-down in the pace of investment and deployment across the region. In Germany, energy is set to be a major political battleground for next month's election, but vague rhetoric about affordability and policy uncertainty regarding renewable energy subsidies is paralyzing investment. Meanwhile in the UK, the release of feed-in tariff strike price details has boosted the sector, although piecemeal announcements means uncertainty still lingers.

Outside Europe, other developed markets are also struggling to adapt, plagued by policy uncertainty and unstable support mechanisms. Political infighting over Australia's carbon pricing mechanism, for example, has raised questions over its decarbonization agenda, while India's renewable energy certificate market faces an unclear future.

Gil Forer, EY Global Cleantech Leader, says: "Governments know the lights must stay on and that any solutions need to be financially sustainable. While we're not seeing a withdrawal of investors from Europe, changing levels of financial incentives for renewable energy projects has slowed the investment pipeline. However, activity isn't slowing everywhere. Investors are considering new markets with booming energy demand and an abundance of natural resources such as East Africa, Asia, Latin America to energize their portfolio."

Emerging markets stepping up large-scale deployment to meet power demands

Peru, with its strong macro environment and investment climate has significant deployment potential, while Brazil is currently experiencing an "auction fever" and a new regulatory framework could unlock around 21GW of demand for renewables. In Asia, safety concerns across South Korea's nuclear sector may create renewable energy opportunities, although mixed signals from the new government have left energy policy at a crossroads.

The ongoing success of the South Africa Independent Power Producer (SARIPP) program has made it a key case study for the rollout of public-private partnerships (PPPs), as means of setting tariffs while also driving price competition. Reverse auctions have helped the South African Department of Energy procure over 2GW of its 2016 3.7GW target, with further rounds underway.

Ben Warren, EY Global Cleantech Transactions Leader comments: "In a world of constrained government balance sheets and a growing need to secure energy supplies, PPPs are quickly becoming one of the most effective ways for policy makers to stimulate long-term investment and sustainable renewable energy deployment."

Elsewhere in Africa, healthy economic growth, a rising population and huge base-load energy potential from geothermal is making East Africa ripe for investment. At a country level, Kenya is targeting 8GW of additional renewables capacity by 2030 to meet an expected uplift in energy demand by 8% per annum, while Uganda is aiming to generate 61% of total energy consumption from renewables by 2017, from just 4% in 2007. Tanzania forecasts power demand to increase almost 500% by 2031, requiring an investment of around US$8b.

Forer comments: "Significant investment by international finance institutions and state-owned entities has sent a clear signal of the energy opportunities that exist in these emerging markets. The need for both energy security and increased supply has created an investor appetite to make renewables the cornerstone of the energy mix of these economies."

A number of global pacts and initiatives agreed in recent months have sent strong signals that the energy agenda can transcend national borders as well as overcome potentially harmful protectionist measures via amicable solutions. July saw both the signing of a climate change pact between China and the US setting out a five-point action plan, and a solution that will replace the EU anti-dumping tariffs on Chinese solar imports with minimum prices and quantity quotas.

Capital must be found in new places

Adapting to austerity has prompted a rise in innovative funding solutions to identify new sources of capital. Due to constrained balance sheets and a tight project finance market, the sector has sought to raise capital through increased IPO activity, recycling of project sponsor funds via strategic divestments and leveraging of capital markets. This has been particularly prevalent within the biomass market – where a lack of a free "natural resource" adds greater perceived risk and a more volatile margin creates the need for more innovative approaches to raising capital.

Warren says: "New clean energy investment levels globally suggest the demand for new capital is not subsiding and liquidity needs to increase, especially with technologies such as bio-energy. Capital innovation in bio-energy continue to evolve, closely following innovations in contracting models, the development of a liquid trading market for feedstock and the commoditization of some parts of the project spectrum. To increase liquidity, policy commitment to the sector is vital. Legislators need a clear and consistent approach, to enable market forces to work appropriately."

Utility transactions allocate risk and reward

As the energy industry adapts, constrained balance sheets and the entry of new investor groups looking for long-term stable yields, have galvanized a shift in utilities from asset owners to asset operators. Utilities are increasingly looking to divestment, particularly of renewable assets, as a way of creating sustainable capital flows for reinvestment in emerging markets and technologies.

Alison Kay, EY Global Power & Utilities Leader comments: "This shift has triggered a wave of divestment activity. In 2012 alone, major utilities worldwide sold around US$12.5b worth of renewable energy assets. This changing model requires a re-examination of where the risks and rewards associated with such assets should sit. Maximizing income certainty and minimizing generation risks have therefore become critical strands of these divestment transactions.

Looking ahead at the future of the renewable energy industry Warren concludes "Governments, corporations, investors and developers are all looking for ways to adapt to this new energy world. We can expect the use of innovative funding solutions, business models and policy instruments to become the norm as the industry firmly establishes itself within the global energy mix."

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